Wooing Germany: Macron team debates euro zone reform tactics

BERLIN (Reuters) - In the days before Emmanuel Macron traveled to Berlin in March to meet Angela Merkel, people in his entourage debated what message he should send to the German chancellor.

Emmanuel Macron, head of the political movement En Marche ! (or Onwards !) and candidate for the 2017 presidential election leaves the Chancellery after a meeting with German Chancellor Angela Merkel in Berlin, Germany, March 16, 2017. At R, Sylvain Fort, head of communication for Macron. REUTERS/Fabrizio Bensch

Some urged him to lay out a clear quid pro quo on Europe, explaining reforms he would do as French president, what Germany could deliver in response, and areas where the two countries should pursue common initiatives, sources in his team said.

In the end, that approach was rejected. His closest aides felt it would be presumptuous for the young candidate to appear to be making demands of Merkel before he was even elected.

But the debate highlighted divisions within his camp over how best to deliver on one of Macron’s biggest election promises: turning the troubled Franco-German couple into a force for closer integration in Europe.

“You have three camps within the Macron world: those who want to confront Germany aggressively, those who want to be friendly but firm, and those who simply want to follow the German lead,” said one person familiar with the debate.

Macron himself has signaled that he wants to take the middle road. But after his victory over far-right leader Marine Le Pen in the French election on Sunday, the debate within his team is likely to intensify.

The future of Europe’s single currency bloc may depend on the outcome. Although Macron’s defeat of far-right leader Marine Le Pen on Sunday has bought Europe time, many economists believe the euro zone remains vulnerable to shocks.

Some worry that the unwinding of the European Central Bank’s bond-buying scheme risks sparking a new crisis in highly indebted member states like Italy.

They are looking to Germany and France, long the drivers of European integration, to find the answers. But years of French economic underperformance, ambivalence about reforms and repeated violations of EU fiscal rules have sapped German confidence in its neighbor, dimming prospects for a deal.

“Germany has lost confidence in the French model, the French system, and has deep-seated doubts as to whether France is still fundamentally aligned in terms of economic philosophy and strategy,” Philip Hildebrand, vice chairman of Blackrock and a former governor of the Swiss central bank, told a conference in Luxembourg on Friday.

TRUST

After Francois Hollande formally hands power to Macron next Sunday, the new president is expected to visit Berlin again. Germany will hold an election in September, but his advisers have said they will not wait until a new government is in place to begin informal talks on euro zone reform.

During the election campaign, he called for the creation of a budget and finance minister for the currency bloc, both ideas that are viewed with scepticism in Berlin.

One Macron aide told Reuters that a serious discussion with Germany would also be needed on boosting investment spending, reforming its services sector, changing EU fiscal rules and addressing its large current account surplus.

“There’s a need to rebuild trust on both sides,” the aide said. “It goes both ways.”

That message may not go down well in Berlin, especially in Wolfgang Schaeuble’s finance ministry, where officials remain skeptical about whether Macron can deliver on his promises to reform the French economy - a step officials here view as a precondition for substantive talks on euro zone reform.

“I’ll believe it when I see it,” one official in the ministry told Reuters last week before Macron’s victory. “I am not one of those who believes Macron is the answer to all of Europe’s problems.”

An official close to Merkel said that while Germany was prepared to talk with Macron about Europe, France would have to recognize the importance of “rules and conditionality” in any reform of the euro zone.

CONVERGENCE

But the official also saw some scope for convergence, leaving the door open to Macron’s idea of a broader discussion between Paris and Berlin that would encompass cooperation on defense, security and migration, as well as euro zone reform.

Merkel has also come around to the idea, shared by Macron’s team, of a “multi-speed” Europe in which groups of like-minded countries press ahead with integration in specific policy areas.

Officials on both sides say they like the idea of creating a multi-year “roadmap” for closer integration.

One unresolved question is whether the Germans might agree to a limited form of common debt issuance at the end of a four or five year horizon. Berlin repeated its opposition on Monday.[B4N1FT002]

One Macron adviser warning against a confrontational approach with Berlin is Sylvie Goulard, a German-speaking member of the European Parliament who is seen as a possible foreign minister. She accompanied the candidate when he met with Merkel in the Chancellery in March.

“My concern is what happens here, not there,” Goulard told Reuters in Paris last month. “The best way to convince the Germans is not to start by discussing grand visions for Europe.”

One mistake Macron’s team says it will not make is to bet on a Merkel loss in September, as Hollande seemed to do five years ago. Her challenger is Martin Schulz, the former head of the European Parliament and a staunch supporter of closer integration.